The Fed September minutes expressed concern that the strength of the dollar could have adverse effects on the US external sector. This is important as it expresses the first united Fed concern about USD strength.
Technically, the upside break of 1.2710/1.2720 in EUR/USD is important and warns of further near-term gains ahead of 1.30/1.31. To protect the P&L we take profit. Fundamentally, we maintain our bearish EUR/USD forecasts on growth/monetary policy and will look to re-enter this trade at better levels.
Strategy
The Fed minutes from the September meeting stated that ‘some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector’. This is important as it expressed the first united Fed concern about the recent USD strength following individual comments from several Fed speakers in recent weeks. IMM data show that speculators are substantially short EUR/USD (see chart 1). Technically, the upside break of 1.2710/1.2720 is important. Given the Fed minutes and positioning this raises the risks of a larger near-term correction in EUR/USD ahead of 1.30/1.31. To protect the P&L we take profit on this trade, which we entered on 28 May. Fundamentally, we still like this trade and will look to re-enter it at better levels.
Fundamentals
Fundamentally, we remain USD bulls and EUR bears, maintaining our EUR/USD forecasts at 1.25 in 1M, 1.22 in 3M, 1.20 in 6M and 1.23 in 12M. We expect US non-farm payrolls to rise to around 250k over the coming three to four months as solid growth in Q2 and Q3 should feed through to hiring. Meanwhile, risks to euro-zone growth are on the downside, underlined by August Factory Orders and Industrial Production from Germany that fell sharply. September euro-zone headline CPI was at 0.3% y/y with the core CPI falling to 0.7%. The risks of deflation will put pressure on the ECB to provide more easing. An expansion of ECB’s balance sheets will weaken the EUR as it may crowd out foreign buying of periphery bonds, while asset managers increase FX hedging of euro-zone assets.
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